Peak returns: a mix of low- and high-risk funds is best, according to our panel of financial advisers. Photograph: Alamy

Under the new pension freedoms that began earlier this month, anyone over 55 can take control of their savings and manage it how they want. But where should you put the cash to be sure of a decent income?

How to get started

• Contact your employer’s pension provider and ask what options it offers. You can leave your money invested with it, but the range might be limited.

• If you have a number of past pensions at different providers, consolidate them in one place. This means opening a self-invested personal pension (Sipp), which you can use as a single platform for your money, choose where to invest it and draw down money as you need it.

It’s all about risk

Leaving money in a bank has (almost) zero risk but gives you a return of just 1%-2% at the moment. An annuity will give you certainty, but the income dies when you do, leaving nothing for your heirs. The funds below hope to pay 3% or more a year, but come with significant risk as you will be subject to swings in the stock market.

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Jason Hollands of BestInvest says: “There is nothing else that is going to provide you with the certainty and security of an annuity, so retirees should stick with annuities or, depending on the size of their pension pots, consider a combination of an annuity purchase to secure a basic guaranteed income for life and a portfolio of funds where they are prepared to take a greater level of risk.

“That is likely to be a better strategy than going fully into drawdown and hoping to find a fund to replicate what an annuity will provide – you won’t.”

Types of funds

Lower-risk bond funds invest in things such as gilts (government bonds) and corporate bonds, but your income is likely to be 2%-3%. Equity income funds, which invest in shares such as Shell and HSBC and rely on them paying dividends, offer higher income and the potential to grow your capital, but are more risky. Expect to get around 3.5%-4.5% a year in income.

You also need to choose between index funds that are low-cost and aim to replicate the performance of an index such as the FTSE 100. Active funds use a fund manager to pick a selection of shares, but are pricier.

Never buy just one fund. Advisers recommend a balance of low and high-risk funds. You can usually invest as little as £1,000 in any one fund.

“The Threadneedle fund is a core UK equity income fund with a pragmatic investment style, but I would consider dovetailing it with the Standard Life fund. International equity diversification is also important, and the Artemis fund is invested in around 90 companies from 28 countries. M&G Property Portfolio is relatively light in central London and more exposed to the regions, which should play catch-up as the recovery broadens.”

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Brian Dennehy, Dennehy Weller: JOHCM UK Equity Income (4.2%); Schroder Income (3.4%); Newton Emerging Income (4.3%); Newton Asian Income (4.4%); Artemis Global Income (3.3%). These funds comprise Dennehy Weller’s model income portfolio. The JOHCM and Schroder funds have historically committed to increasing payouts, while the Newton funds give exposure to dividends from companies in Asia and other emerging markets, but expect “bumps along the way”.

“A £10,000 investment in Ecclesiastical Higher Income in 1994 would have paid £400 in the first year. If you drew the natural yield each year, it would now be paying £1,150 a year, or 11.5% of your investment. I also like the Woodford Equity Income fund. As a custodian of long-term retirement funds there are few better than Neil Woodford. Marlborough Multi Cap Income offers a different take on the traditional equity income fund. Most funds in this space invest in the FTSE 100 big blue chips but this one prefers medium and small-cap companies. The Henderson Cautious Managed fund is split half in shares and half in bonds and cash.”

The low-cost route

All the funds above are actively managed, so you end up paying fund managers’ salaries. An alternative is to use index funds. Two worth considering are the Vanguard UK Equity Income, which yields 3.9% and has an annual fee of 0.22% – at least 0.5% less than the standard active fund – and the Legal & General FTSE 100 Index, yielding 3.3% with an annual charge of just 0.1%.

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